Preference Due Diligence in the Crypto Winter
by | posted in: Avoidance, Bankruptcy, Chapter 11, Fiduciary Duties, Preference | 0

By Michael Rosella (Katten Muchin Rosenman LLP) and Dan McElhinney (Stretto)

Michael Rosella
Dan McElhinney

The crypto winter has arrived! Among many other issues of first impression for bankruptcy courts is the question of how the increased due diligence standards for preference actions set forth in the Small Business Reorganization Act of 2019 (the “SBRA”) will play out in a crypto case. The SBRA raised the bar on the due diligence needed to pursue preference litigation, requiring the debtor or trustee to assess “known or reasonably knowable affirmative defenses” before moving forward.

This article first assesses lingering disagreements related to the “heightened” pleading standard as applied to preference causes of action set forth in In re Valley Media and its progeny. Next, we delve into the cases interpreting the new due diligence standard set forth in the SBRA, as there is already disagreement on how to interpret the SBRA. Certain courts suggest the new due diligence standard constitutes an element of a preference claim that must be specifically pled in a complaint in order to avoid dismissal; others do not. Yet courts in this latter group, while eschewing the idea of a new element, do consider any information regarding pre-complaint due diligence efforts in the complaint, nonetheless. We then consider the issues unique to the opaque world of a cryptocurrency debtor that may impact the debtor or trustee’s ability to satisfy a heightened due diligence standard. Questions relating to the potential differences in assessing cash vs. crypto transfers and whether debtors or trustees will have access to key demographic and transaction data are considered. For example, whereas a debtor dealing in cash transfers would likely have bank statements, canceled checks, and access to accounting systems with basic transferee information, debtors transferring cryptocurrency to the independent digital wallet of a customer or counterparty would be less likely to have access to basic information necessary to satisfy a heightened due diligence standard.

We also provide key takeaways that highlight measures that cryptocurrency debtors should take to comply with the pleading and due diligence requirements. For example, a debtor in a cryptocurrency case should include in the complaint a recitation of its efforts to conduct reasonable due diligence — including efforts to obtain information needed to consider affirmative defenses, as well as reference to demand letters sent inviting the transferee to assert such defenses—to minimize any dismissal risk.

Click here to read the full article.

 

Critical Vendor Order Insufficient to Protect Critical Vendors Against Preference Claims
by | posted in: Avoidance, Bankruptcy Roundtable Updates, Chapter 11, Preference | 0

By Nicholas A. Koffroth (Fox Rothschild)

Nicholas A. Koffroth

In Insys Liquidation Trust v. MeKesson Corporation (In re Insys Therapeutics, Inc.), No. 21-50176 (JTD), No. 21-50176, 2021 WL 3083325 (Bankr. D. Del. July 21, 2021), the United States Bankruptcy Court for the District of Delaware reminded practitioners to exercise caution when analyzing the scope of protections offered by critical vendor orders.  The order at issue in Insys Therapeutics provided that “[t]he Debtors are authorized, but not directed . . . to maintain and administer the Customer Programs” and that “[n]othing contained . . . in this Final Order is intended to be or shall be construed as . . . (c) a waiver of any claims or causes of action that may exist against any creditor or interest holder.”  These common provisions proved critical in the Court’s holding that “something more is required” to insulate critical vendors from preference liability.

In the opinion, the Court denied a motion to dismiss the complaint brought by a group of critical vendors for three reasons.  First, the Court held that preferential payments that occur before the entry of a critical vendor order cannot be protected by a subsequent authorization to pay outstanding prepetition claims unless specifically provided in the order.  Second, the permissive language of the critical vendor order did not support the vendors’ claim that the prepetition payments would necessarily have been authorized had they been made postpetition.  Third, the critical vendor order expressly preserved the estates’ claims against critical vendors.  Additionally, the Court analyzed and rejected application of the limited “critical vendor defense.”

The article discusses the Court’s holding in greater detail and offers practical considerations for practitioners. The full article is available here.

Amicus Brief on the Scope of the Bankruptcy Safe Harbor for Securities Settlement Payments Filed in Merit Mgmt. v. FTI Consulting
by | posted in: Avoidance, Bankruptcy Roundtable Updates, Financial Firms and Safe Harbors | 0

By Ralph Brubaker (University of Illinois College of Law), Bruce A. Markell (Northwestern University Pritzker School of Law), Charles W. Mooney, Jr. (University of Pennsylvania Law School), and Mark Roe (Harvard Law School).

Bankruptcy Code § 546(e) contains a safe harbor that prevents avoidance of a securities settlement payment, e.g. as a preferential or constructively fraudulent transfer. This amicus brief was filed in Merit Management Group, LP v. FTI Consulting, Inc., No. 16-784 (U.S.). The brief explains how § 546(e) rationally constrains its scope via the statutory specification that the safe harbor only applies (because it need only apply) if the “transfer” sought to be avoided was allegedly “made by or to (or for the benefit of)” a protected securities market intermediary, such as a stockbroker or a financial institution.

Ascertaining the meaning and function of that determinative scope language requires an understanding of (1) the concept of a “transfer” as the fundamental analytical transaction unit throughout the Code’s avoidance provisions, and (2) the relationship between that avoidable “transfer” concept and the inextricably interrelated concepts of who that “transfer” is “made by or to (or for the benefit of).” By its express terms, § 546(e) only shields a challenged “transfer” from avoidance if (1) that transfer was “made by” a debtor-transferor who was a qualifying intermediary, “or” (2) a party with potential liability—because the challenged transfer allegedly was made “to or for the benefit of” that party—was a protected intermediary. Thus, the transfer of cash to a stock seller and of the stock back to the buyer is not safe-harbored. The delivery of the cash (and the stock) through financial intermediaries, however, is.

The full amicus brief may be found here.

Oral argument took place on November 6, 2017. The transcript is available here. The roundtable previously posted an article by Ralph Brubaker on the meaning of § 546(e) and a roundup of law firm perspectives on the Seventh Circuit’s decision in FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690 (7th Cir. 2016). The Supreme Court granted certiorari to review the decision on May 1, 2017. Petitioner Merit Management Group, LP’s opening brief was subsequently filed, along with the Respondent’s brief, and Petitioner’s reply. Additional amicus curiae briefs were filed by Opportunity Partners, L.P., Various Former Tribune and Lyondell Shareholders, Tribune Company Retirees and Noteholders, and the National Association of Bankruptcy Trustees.

Understanding the Scope of the § 546(e) Securities Safe Harbor Through the Concept of the “Transfer” Sought to Be Avoided
by | posted in: Bankruptcy Roundtable Updates, Financial Firms and Safe Harbors | 0

By Ralph Brubaker (University of Illinois College of Law)

Bankruptcy Code § 546(e) contains a safe harbor that prevents avoidance of a securities settlement payment. To date, pleas for sane limits on the scope of the § 546(e) safe harbor have focused upon what kinds of transactions should be considered a “settlement payment.” That language, however, is not the primary means by which § 546(e) both reveals its manifest object and correspondingly limits its reach thereto. Section 546(e) rationally constrains its scope via the statutory specification (the meaning of which the Supreme Court will consider in the pending case of Merit Management Group v. FTI Consulting) that the safe harbor only applies (because it need only apply) if the “transfer” sought to be avoided was allegedly “made by or to (or for the benefit of)” a protected securities market intermediary, such as a stockbroker or a financial institution.

Ascertaining the meaning and function of that determinative scope language requires an understanding of (1) the concept of a “transfer” as the fundamental analytical transaction unit throughout the Code’s avoidance provisions, and (2) the relationship between that avoidable “transfer” concept and the inextricably interrelated concepts of who that “transfer” is “made by or to (or for the benefit of).” By its express terms, § 546(e) only shields a challenged “transfer” from avoidance if (1) that transfer was “made by” a debtor-transferor who was a qualifying intermediary, “or” (2) a party with potential liability—because the challenged transfer allegedly was made “to or for the benefit of” that party—was a protected intermediary.

The full article is available for download here.

The roundtable previously posted a roundup of law perspectives on the Seventh Circuit’s decision in FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690 (7th Cir. 2016). The Supreme Court granted certiorari to review that decision on May 1, 2017. Petitioner Merit Management Group, LP has filed its opening brief, and amicus curiae briefs have been filed by Opportunity Partners, L.P. and Various Former Tribune and Lyondell Shareholders. Argument has been scheduled for November 6, 2017.